Economist sees post-war bounce

Odds favor quick, decisive war, Global Insights says

WALTHAM, Mass. (CBS.MW) -- The U.S. economy would probably shake off its doldrums and emerge from a three-year slump once Iraq is defeated on the battlefield, according to forecast by Global Insights, a leading economic forecasting firm.

"A short war with Iraq will result in a decisive victory," predicted Nariman Behravesh, chief economist at Global Insight, which is the new brand name for DRI and WEFA, two well-known econometric firms.

A "reasonably benign" outcome has about a 70 to 80 percent chance of occurring, Behravesh said. Read more.

In the worst-case scenario (with less than 2 percent chance of occurring), the war spreads to encompass the entire region, killing thousands and damaging oil supplies. With oil above $60 a barrel, the U.S. economy would enter another recession and the Fed would cut interest rates to 0.25 percent.

However, it's much more likely that the war will end well and the economy will prosper, he said. The baseline forecast (60 percent chance) sees a decisive victory over Iraq after about two months of fighting.

In that quick war scenario, oil prices would spike to more than $40 as fighting begins, only to plunge once it's clear that supplies won't be disrupted. Consumer and business confidence would also rebound once the uncertainties are gone.

The U.S. economy would probably enjoy a few quarters of above-trend growth, helped by tax cuts and more government spending, Behravesh said.

"We've worked through most of the imbalances" in the economy that led to the recession and have kept growth sub-par for the past year, Behravesh said.

The firm assigns an additional 20 percent chance to the possibility that "victory" could be achieved without a war, either through "voluntary" disarmament, resignation, a coup d'etat or a very quick war that caused minimal damage or casualties.

2 remote possibilities

Two other scenarios that leave the outcome unsettled are deemed to have less than 10 percent chances of occurring.

If the United States stepped back from the brink of war while Iraq continued to make "half-hearted concessions and promises," Behravesh would see a continuation of the status quo, with $30-plus a barrel oil and very weak economic growth for at least another year. Last week's debate in the Security Council boosted the odds of this outcome, he said.

A long, drawn out war lasting six months or more with heavy U.S. casualties is also a remote possibility, he said. Under this scenario, oil prices would jump to $50 a barrel, depressing the economy and forcing the Fed to cut rates to 0.75 percent.

None of Behravesh's scenarios take the possibility of domestic terrorism into account. "The chances of a major terror attack are quite small" for the next few years, he said.

But others don't read it the same way.

Goldman's view

"Geopolitical risks will remain even if the war is quick and successful," said Bill Dudley, chief economist at Goldman Sachs in a recent note. "North Korea will still have nuclear weapons capability and al Qaida will still be determined to unleash terrorist attacks on the U.S. and elsewhere."

In addition, Dudley warns that investors may have a rosy view of what would happen to oil prices and economic growth even under the most favorable outcome. Oil supplies will still be tight after the war is over, Goldman Sachs says, predicting that oil would still be priced at $30 a barrel or so.

"The United States economy will continue to undergo structural adjustments post-bubble that will restrain the pace of economic activity," Dudley said. "The stock market decline is provoking balance sheet adjustments by businesses, households, and state and local governments at a time that the stimulative impulse from fiscal and monetary policy has lessened."

Simply put, U.S. companies still have plenty of work to do before we can declare an end to the slump in capital spending and hiring. The war is distracting us from underlying problems that won't be resolved one way or the other by war.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.